IDEAS home Printed from https://ideas.repec.org/a/taf/quantf/v19y2019i1p137-154.html
   My bibliography  Save this article

Cross-impact and no-dynamic-arbitrage

Author

Listed:
  • M. Schneider
  • F. Lillo

Abstract

We extend the ‘No-dynamic-arbitrage and market impact’-framework of Gatheral [Quant. Finance, 2010, 10(7), 749–759] to the multi-dimensional case where trading in one asset has a cross-impact on the price of other assets. From the condition of absence of dynamical arbitrage we derive theoretical limits for the size and form of cross-impact that can be directly verified on data. For bounded decay kernels we find that cross-impact must be an odd and linear function of trading intensity and cross-impact from asset i to asset j must be equal to the one from j to i. To test these constraints we estimate cross-impact among sovereign bonds traded on the electronic platform MOT. While we find significant violations of the above symmetry condition of cross-impact, we show that these are not arbitrageable with simple strategies because of the presence of the bid-ask spread.

Suggested Citation

  • M. Schneider & F. Lillo, 2019. "Cross-impact and no-dynamic-arbitrage," Quantitative Finance, Taylor & Francis Journals, vol. 19(1), pages 137-154, January.
  • Handle: RePEc:taf:quantf:v:19:y:2019:i:1:p:137-154
    DOI: 10.1080/14697688.2018.1467033
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/14697688.2018.1467033
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Alexander Schied & Torsten Schoneborn & Michael Tehranchi, 2010. "Optimal Basket Liquidation for CARA Investors is Deterministic," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(6), pages 471-489.
    2. Modena, Matteo & Linciano, Nadia & Gentile, Monica & Fancello, Francesco, 2014. "The liquidity of dual-listed corporate bonds: empirical evidence from Italian markets," MPRA Paper 62479, University Library of Munich, Germany, revised 23 Feb 2015.
    3. Shanshan Wang & Thomas Guhr, 2016. "Microscopic Understanding of Cross-Responses between Stocks: a Two-Component Price Impact Model," Papers 1609.04890, arXiv.org, revised Jul 2017.
    4. Schneider, Michael & Lillo, Fabrizio & Pelizzon, Loriana, 2016. "How has sovereign bond market liquidity changed? An illiquidity spillover analysis," SAFE Working Paper Series 151, Leibniz Institute for Financial Research SAFE.
    5. Zoltán Eisler & Jean-Philippe Bouchaud & Julien Kockelkoren, 2012. "The price impact of order book events: market orders, limit orders and cancellations," Quantitative Finance, Taylor & Francis Journals, vol. 12(9), pages 1395-1419, September.
    6. Alfonsi Aurélien & Alexander Schied & Alla Slynko, 2012. "Order Book Resilience, Price Manipulation, and the Positive Portfolio Problem," Post-Print hal-00941333, HAL.
    7. Alfonso Dufour & Minh Nguyen, 2012. "Permanent trading impacts and bond yields," The European Journal of Finance, Taylor & Francis Journals, vol. 18(9), pages 841-864, October.
    8. Jim Gatheral, 2010. "No-dynamic-arbitrage and market impact," Quantitative Finance, Taylor & Francis Journals, vol. 10(7), pages 749-759.
    9. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
    10. Damian Eduardo Taranto & Giacomo Bormetti & Jean-Philippe Bouchaud & Fabrizio Lillo & Bence Toth, 2016. "Linear models for the impact of order flow on prices I. Propagators: Transient vs. History Dependent Impact," Papers 1602.02735, arXiv.org.
    11. Gur Huberman & Werner Stanzl, 2004. "Price Manipulation and Quasi-Arbitrage," Econometrica, Econometric Society, vol. 72(4), pages 1247-1275, July.
    12. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alexander Barzykin & Fabrizio Lillo, 2019. "Optimal VWAP execution under transient price impact," Papers 1901.02327, arXiv.org, revised Jan 2019.
    2. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2020. "How to build a cross-impact model from first principles: Theoretical requirements and empirical results," Papers 2004.01624, arXiv.org, revised Sep 2020.
    3. Qing-Qing Yang & Wai-Ki Ching & Jiawen Gu & Tak-Kuen Siu, 2020. "Trading strategy with stochastic volatility in a limit order book market," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 43(1), pages 277-301, June.
    4. Yi Li & Ju’e Guo & Kin Keung Lai & Jinzhao Shi, 0. "Optimal portfolio liquidation with cross-price impacts on trading," Operational Research, Springer, vol. 0, pages 1-20.
    5. Samim Ghamami & Paul Glasserman, 2019. "Submodular Risk Allocation," Management Science, INFORMS, vol. 65(10), pages 4656-4675, October.
    6. Seungki Min & Costis Maglaras & Ciamac C. Moallemi, 2018. "Cross-Sectional Variation of Intraday Liquidity, Cross-Impact, and their Effect on Portfolio Execution," Papers 1811.05524, arXiv.org.
    7. Luis Carlos Garc'ia del Molino & Iacopo Mastromatteo & Michael Benzaquen & Jean-Philippe Bouchaud, 2018. "The Multivariate Kyle model: More is different," Papers 1806.07791, arXiv.org, revised Dec 2018.
    8. Mehdi Tomas & Iacopo Mastromatteo & Michael Benzaquen, 2020. "How to build a cross-impact model from first principles: Theoretical requirements and empirical results," Working Papers hal-02567489, HAL.
    9. Gerry Tsoukalas & Jiang Wang & Kay Giesecke, 2019. "Dynamic Portfolio Execution," Management Science, INFORMS, vol. 67(5), pages 2015-2040, May.
    10. Francesco Cordoni & Fabrizio Lillo, 2020. "Instabilities in Multi-Asset and Multi-Agent Market Impact Games," Papers 2004.03546, arXiv.org, revised Dec 2020.
    11. L. C. Garcia Del Molino & I. Mastromatteo & Michael Benzaquen & J.-P. Bouchaud, 2019. "The Multivariate Kyle model: More is different," Working Papers hal-02323433, HAL.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:quantf:v:19:y:2019:i:1:p:137-154. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: http://www.tandfonline.com/RQUF20 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.